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The Optical Market: A Health Check

Carolyn Mathas
Prime Reading
Carolyn Mathas
2/13/2014
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As high-speed network infrastructure rollouts and datacenter builds continue, the optical components and systems sectors are delivering ever more efficient transport capabilities. Fueled by the continued migration to all-optical networks, the promise of 100G, and the increasing volume of data being shipped around the world's wide area networks, global investments are climbing. (See 100G Action Spurs Optical Optimism.)

So how's the optical transport market doing? And feeling?

Light Reading asked a number of industry leaders and analyst about what they saw in 2013 and what they're expecting in 2014. There were shining stars in 2013, as there will be in 2014, but also some pockets of the market that just aren't going to move.

Optical transport systems
According to Sterling Perrin, senior analyst at Heavy Reading , "optical transport is a tough market. It's competitive and there is nowhere near the growth of the past -- and we won't see that growth in the future. The area is fragmented, there are a lot of players and, while network traffic continues to grow rapidly, operator revenues can't keep pace. The mission of transport is to lower the cost-per-bit for operators, so the suppliers live in a world of constant price-cutting."

According to Perrin, what growth there is can be found in the core network transport market, which will outperform the overall market in the coming years. Heavy Reading expects the market for core optical transport system to grow from US$4.6 billion in 2013 to almost $5.9 billion in 2017. By contrast, the metro systems market is somewhat stagnant.

Table 1: Worldwide Optical Transport Revenue by Segment, 2012-2017

In US$ millions 2012 2013 2014 2015 2016 2017 CAGR 2012-2017
Metro $7,793 $7,847 $8,082 $8,303 $8,282 $8,195 1.0%
Growth 0.7% 3.0% 2.7% -0.2% -1.0%
Share 65.2% 63.1% 61.9% 61.1% 59.8% 58.3%
Core $4,162.6 $4,596.4 $4,978.8 $5,275.0 $5,557.6 $5,865.2 7.1%
Growth 10.4% 8.3% 5.9% 5.4% 5.5%
Share 34.8% 36.9% 38.1% 38.9% 40.2% 41.7%
Total $11,955.7 $12,443.5 $13,061.0 $13,577.6 $13,839.5 $14,060.5 3.3%
Growth 4.1% 5.0% 4.0% 1.9% 1.6%
Source: Heavy Reading

Beneficiaries of the growing demand for 100G systems include the top four players -- Alcatel-Lucent (NYSE: ALU), Huawei Technologies Co. Ltd. , Ciena Corp. (NYSE: CIEN), and Infinera Corp. (Nasdaq: INFN) -- and, to a lesser extent, the next tier of vendors, including Cisco Systems Inc. (Nasdaq: CSCO), Coriant , and Ericsson AB (Nasdaq: ERIC).

"The strength of core networks accounts for the strength in North America, which grew 13% in 2013, faster than the 10% overall market growth. China is slowing, but still showing growth," says Perrin. "India is a wild card given the political situation over the past couple of years. I thought it would have done better in 2013, but at some point, it will be an opportunity," he adds. (See 'China Hockey Stick' to Sweep Through Optical.)

For the coming year, Perrin identifies a number of trends in components, including: continuing strength in 100G and core networks in general; flex grid or flex spectrum; and ROADMs, which are beginning to do well.

Finisar sees a bright light
For optical transport systems that employ WDM, there are a handful of key component suppliers, namely Finisar Corp. (Nasdaq: FNSR), JDSU (Nasdaq: JDSU; Toronto: JDU), CoAdna Photonics Inc. , and Nistica .

Jerry Rawls is exuberant when he talks about the progress of Finisar, where he is executive chairman. "2013 was an exciting year. It was the company's 25th anniversary and the first year ever that the company hit $1 billion in revenues," he says.

"The trend is to develop faster interconnects and optical transceivers for datacenters. Until recently, 1Gbit/s datacenters were copper, cat cable, RJ-45 jacks. In just three to four years, based on advances in speed, 1Gbit/s moved to 10Gbit/s, which is optical, not copper," Rawls explains.

Finisar is clearly expecting high demand, as it is expanding manufacturing, building a 400,000 sq. ft. facility in China, as well as other facilities for 10Gbit/s and 40Gbit/s. The latter will continue to show strength, according to Rawls, as the cloud datacenter transitions to 40Gbit/s. The company expects to see increasing demand from the US, China, and Europe.

As for the future, Rawls says the metro transport market isn't having much impact yet on a revenue basis, but as systems are launched for metro, accounting for 3x to 5x volume increases, that will likely trigger a new multi-year trend. Line cards will be optimized for metro, size, power, specs and cost, and lower cost for metro will drive business as well, Rawls believes.

And clearly, Finisar is gearing up for greater demand for 100G products. (See Finisar Buys Its 100G Buddy.)

On the subject of M&A, the Finisar man notes a shift in the optical equipment sector. "An interesting event was the privatization of NSN and Tellabs under Coriant by Marlin Equity. This was a private equity deal rather than a consolidation of systems companies. That's a new chapter of consolidation at the transport level," notes Rawls.

Next page: Datacenter drivers for NeoPhotonics, JDSU

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Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
3/3/2014 | 4:40:33 AM
Re: M&A
@DOShea: That's another great point.  Reminds me of all the speculation about Microsoft buying Yahoo after the latter had already snubbed them and then YHOO's stock started tanking because of management issues.  Something tells me there was an active attempt to pump the stock price back up through those rumors.
DOShea
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DOShea,
User Rank: Blogger
3/2/2014 | 12:22:11 PM
Re: M&A
...and especially if the perceived price of Finisar keeps rising, then perhaps Cisco would shy away (Maybe Facebook will buy Finisar, since Zuckerberg seems unafraid of big price tags). I could certainly see more consolidation in this part of the optical sector, one way or another.
Joe Stanganelli
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Joe Stanganelli,
User Rank: Light Sabre
2/28/2014 | 11:58:20 PM
Re: M&A
I dunno... In my experience, the more speculation there is about a particular major company acquiring another particular major company, the less likely that's going to happen... and reports of Cisco being mentioned as a possibility to buy Finisar are so common these days that I think that if anyone does acquire Finisar, it almost certainly WON'T be Cisco!  ;)
danielcawrey
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danielcawrey,
User Rank: Light Sabre
2/14/2014 | 3:19:48 PM
Re: Great to see bullish nature
Good to see that there is a 100G trend approaching. With things like big data becoming a huge facet of networking going forward, being able to handle all this data is going to fall upon the optical market.

They will need to steadily supply the gear and throughput to make this all happen cohesively. 
CMathas
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CMathas,
User Rank: Blogger
2/13/2014 | 2:27:09 PM
Re: M&A
If it's true, the price for Finisar can't help but benefit from the buy recommendations that stock analysts are putting out. The latest one I saw was to value the stock at $30. James Kisner, the analyst from Jefferies & Co. cites strong data center optics demand trends and spending expectations for 2014 for his revised price target. So, the purchase price seems to be moving up...

 
DOShea
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DOShea,
User Rank: Blogger
2/13/2014 | 11:59:24 AM
M&A
Should be inteeresting to see what happens the next few months after Finisar's recent deal. There has already been some speculation about Finisar getting acquired, possibly by Cisco.
Ray@LR
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50%
Ray@LR,
User Rank: Blogger
2/13/2014 | 9:47:44 AM
Great to see bullish nature
There's a real sense of renewed opportunity in the 100G core and datacenter markets, and let's see if metro drives as much business as some expect.

This is going to be intersting to track!
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